Cartilage diseases remain among the most costly musculoskeletal disorders, their treatment continues to be a major clinical challenge. Lack of adequate knowledge regarding the molecular and cellular mechanisms that regulate chondrogenesis primarily causes this scenario. The goal of this proposal attempts to fill this knowledge gap by studying how the development and homeostasis of cartilage are regulated by the newly identified population of cathepsin K (Ctsk)-expressing chondroid progenitors (CCP) and by the cytoplasmic protein tyrosine phosphatase SHP2 (encoded by PTPN11). In a recent study aimed at characterizing the skeletal phenotype of mice lacking SHP2 in Ctsk- expressing cells, we made two important and interrelated discoveries (Nature, 2013. 499:491-5). First, we identified a novel population of CCP which primarily reside in the perichondrial groove of Ranvier and also sparsely scatter in articular and growth plate cartilage. CCP express mesenchymal stem cell (MSC) surface markers and appear to play a role in cartilage development and homeostasis. Second, we found that SHP2 functions as a tumor suppressor in cartilage: SHP2 deletion in CCP in mice yields a striking skeletal phenotype, featuring the growth of osteochondromas and enchondromas in bone. These skeletal diseases recapitulate the clinical features of metachondromatosis, a cartilage tumor syndrome in humans in which heterozygous SHP2 loss-of-function (LOF) mutations have been identified. Our findings strongly suggest that CCP are a phenotypically and functionally distinct pool of cartilage stem cells, and SHP2 is a key modulator of CCP and possibly other chondroid cells during chondrogenesis. Little is known about the regulatory role of SHP2 in chondrogenesis and cartilage homeostasis, in contrast to the vast literature regarding protein tyrosine kinase signaling in this context. We hypothesize that CCP are cartilage stem cells; SHP2 regulates fate decisions of CCP and chondrogenesis by influencing the expression and transcriptional activity of the master chondrogenic transcription factor SOX9. Altered SOX9 expression and transcriptional activity as a result of SHP2 deficiency can cause excessive cell proliferation, differentiation and cartilaginous neoplasm. The specific objectives of this proposal are to determine CCP, to what extent, are truly cartilage stem cells; and mechanistically how SHP2 regulates chondrogenesis and SHP2 loss-of-heterozygosity mutations cause cartilage tumorigenesis. Our long-term objective is to develop strategies to inhibit cartilage degeneration and promote its regeneration and homeostasis by mobilizing CCP and/or modifying SHP2-regulated signaling pathway(s). The outcome of this study will shed new light on the development of novel therapeutics and regenerative approaches to a spectrum of cartilage diseases, from tumors to osteoarthritis.